SOCIAL COST-BENEFIT ANALYSIS: A STUDY OF POWER PROJECTS

Rishi Shankar Pathak

Summer Intern, PMI-NTPC, Noida

Keywords: Social Cost Benefit Analysis-UNIDO Approach, Coal Plant, Hydro Plant, Power
Project

Abstract:
Capital is the limited resource in a developing economy like India and must be invested with
utmost care. While a private individual investor is not expected to be an altruistic seeker of
only national interest, he must be motivated by commercial return on his investment. It is also
true that development financial institutions of country must examine social cost benefit
implication of their investment decisions. Social cost benefit analysis is an appraisal tool to
evaluate a project from the view point of the society as a whole. It refers to the analysis of the
costs and/or the benefits that a society may have to bear and/or get from the proposed project.
It is a study of feasibility of a project in terms of its total economic cost and total economic
benefits. The paper analyses the application of Social Cost Benefit Analysis using UNIDO
approach on thermal coal based power plant and a hydro power plant and tries to highlight
the social costs and benefits associated with each project. It also focuses on the comparative
analysis of the coal and hydro projects. The paper suggests the key steps that can be taken to
make the projects more lucrative.

1. Introduction

Social Cost Benefit Analysis (SCBA) is also referred as Economic Analysis (EA). SCBA or
EA is a feasibility study of a project from the viewpoint of a society to evaluate whether a
proposed project will add benefit or cost to the society. That is, it is an approach that is
concerned to judge the economic and social viability of a project especially public
expenditure project or donor-led programs.

SCBA model is based on the theory of welfare economics, according to which the welfare of
a society depends on the aggregate individual utility levels of all members of that society.
SCBA had, at first, used for evaluating public investments in the decade of 1960s and 1970s.
In those decades, this model had got a good emphasis; because public investments in many
countries, especially in developing countries, were immensely increased. Nowadays, SCBA
is also becoming important for private project or investment as more often there is a
possibility for this kind of projects to bring adverse impact to the society.

In the context of planned economies, SCBA aids in evaluating individual projects within the
planning framework which spells out national economic objectives and broad allocation of
resources to various sectors. In other words, SCBA is concerned with tactical decision
making within the framework of broad strategic choices defined by planning at the macro
level. The perspectives and parameters provided by the macro level plans serve as the basis of
SCBA which is a tool for analyzing and appraising individual projects.
As an aid to planning, decision-making, evaluation and control, the social cost benefit
analysis provides a scientific and quantitative base for the appraisal of projects with a view to
determine whether the total social benefits of a project justify the total social costs.
The need for a scientific social cost benefit analysis arises because of the fact that the criteria
used for measuring commercial or trading profitability that normally guide capital budgeting
in the private sector investing projects may not be appropriate for public or social (macro)
projects investment decisions. Private investors are most interested in minimizing private
costs and hence they take into consideration only those elements or costs which directly
affect their private earnings i.e. the private expenses and private benefits. Both private
earnings and private costs are valued at the prevailing market prices for al accounting
purpose. But the existence of externalities i.e. the social costs and social benefits introduces
bias in the market price based investment decisions.

To make a scientific and systematic social cost benefit analysis of projects, it is necessary to
weigh each project’s advantages (benefits) and disadvantages (costs) to the society or nation
as a whole. Thereafter, various projects under consideration are ranked on the basis of social
cost benefit ratio and the final decision about the selection of a project is taken based on the
score in ranking. In other words, a social costs benefit analysis is a vital tool for comparing
economic alternatives.

1.1 CBA vs. SCBA

In general, any project appraisal must distinguish between three components: Financial,
Economic, and Social Appraisal.

a. Financial Appraisal examines the financial flows generated by the project itself,
and the direct costs of the project measured at market prices.

b. Economic Appraisal adjusts costs and benefits to take account of costs and
benefits to the economy at large, including the indirect effects of the project that are
not captured by the price mechanism.

c. Social Appraisal examines the distributional consequences of project choices, both

intertemporal concerns (i.e. effects over a period of time, today versus the future); and
also intratemporal concerns (e.g. concerns between groups in society at a specific
point in time).

Cost Benefit Analysis can only perform the financial appraisal wholly for evaluating a
project. In some instances, it can adjust costs and benefits to the economy except
environmental externalities. But in case of social appraisal, it is fully incapable to do so. On
the other hand, SCBA is able to perform all of these three appraisals to judge a project.

CBA determines all costs and benefits of a project in terms of market price. But in imperfect
market, market price can not reflect social value. That’s why; SCBA quantifies all social cost
and benefits of a project at shadow price instead of market price. In addition, typically CBA
uses consumer surplus to compute benefits and costs. But SCBA determine those in terms of
either consumption or uncommitted social income. In fine, it can be said that CBA often
produces inferior results in terms of both environmental protection and overall social welfare
in comparison to SCBA.

1.2 Rationale for SCBA

In SCBA the focus is on the social costs and benefits of the project. These often tend to differ
from the monetary costs and benefits of the project. The principal sources of discrepancy are:
• Market Imperfection
• Taxes and Subsidies
• Concern for Savings
• Concern for redistribution
• Merit Wants

 Market Imperfections

Market prices, which form the basis for computing the monetary costs and benefits
from the point of view of the project sponsor reflect social values only countries.
When imperfections exist, market prices do not reflect social values.

The common market imperfections found in developing countries are:

(i) Rationing,
(ii) Prescription of minimum wage rates, and
(iii) Foreign exchange regulation.

Rationing of a commodity means control over its price and distribution. The price
paid to labor is usually more than what the wages would be in a competitive labor
market free from such wage legislations. The official rate of foreign exchange in
developing countries, which exercise close regulation over foreign exchange, is
typically less than the rate that would prevail in the absence of exchange regulations.

 Taxes Subsidies

From the private point of view, taxes are definite monetary costs and subsidies are
definite monetary gains. From the social point of view, however, taxes and subsidies
are generally regarded as transfer payments and hence considered irrevalant.

 Concern for Savings

Unconcerned about how its benefits are divided between consumption and savings, a
private firm does not put differential valuation on savings and consumption and
savings (which leads to investment) is relevant, particularly in the capital-scarce
developing countries. A Rs of benefits saved is deemed more valuable than a Rs of
benefits consumed. The concern of the society for savings and investment is duly
reflected in SCBA where in a higher valuation is placed on savings and a lower
valuation is put on consumption.

 Concern for Redistribution

A private firm does not bother how its benefits are distributed across various groups
in the society. The society, however, is concerned about the distribution of benefits
 across different groups. A Rs of benefit going to an economically poor section is
considered more valuable than a Rs of benefit going to an affluent section.

 Merit Wants

Goals and preferences not expressed in the market place, but believed by policy
makers to be in the larger interest, may be referred to as merit wants. For example, the
government may prefer to promote an adult education programme or a balanced
nutrition programme for school-going children even though these are not sought by
consumers in the market place. While merit wants are not relevant from the private
point of view, they are important from the social point of view.

1.3 Objectives of SCBA

The objective of social cost-benefit analysis is, in its widest sense, to secure and achieve the
value of money in economic life by simply evaluating the costs and benefits of alternative
economic choices and selecting an alternative which offers the largest net benefit. Therefore,
it can be said that the main focus of Social Cost Benefit Analysis i to determine:

1. Economic benefits of the project in terms of a price (shadow price) that reflect
social value;
2. The impact of the project on the level of savings and investments in the society;
3. The impact of the project on the distribution of income in the society;
4. The contribution of the project towards the fulfilment of certain merit wants (self-
sufficiency, employment etc).

2. Methodology

The UNIDO Approach for Social Cost Benefit Analysis as prescribed by United Nation
Industrial Development Organization (UNIDO) was applied to a thermal coal based power
plant and a hydro plant.

2.1 UNIDO APPROACH

The United Nation Industrial Development Organization (UNIDO) and the Centre for
Organization of Economic Co-operation and Development (COECD) have come with useful
publications dealing with the problem of measuring social costs and social benefits. It may be
noted, in this context, that the actual cost or revenues from the goods and/or services to the
organization do not necessarily reflect the monetary measurement of the cost ant or benefit to
the society. This is because these figures are grossly distorted on account of restriction and
controls imposed by the government. Hence a different yardstick has to be used for
evaluating a particular in terms of cost and sacrifice on the part of the society. Such payments
are easily valued at opportunity cost or shadow prices to judge their real impact in terms of
cost to society for the purpose of social cost benefit evaluation.

UNIDO Approach is a five stage methodology:

1. Calculation of financial profitability measured at market prices.

2. Obtaining the net benefit of the project measured in terms of economic prices.
 3. Adjustment for the impact of the project on savings and investment.
4. Adjustment for the impact of the project on income distribution.
5. Adjustment for the impact of the project on merit goods and demerit goods
2.1.1 Calculation of Financial Profitability Measured at Market Prices

A good technical and financial analysis must be done before a meaningful economic
evaluation can be made. For this reason, financial profitability is a prerequisite in all cases.
Financial profitability produces an estimate of the project’s financial profit or the net present
value of the project when all inputs and outputs are measured at market prices. The first step
in stage one is to complete standard tables of income statement, balance-sheet and cash-flow.
The financial income statement is the central table in this analysis as it is used to record the
inputs and outputs of the project. Cash flow statement is also important here as the financial
income statement only shows the annual profit and disguise investment. The net cash flow is
derived from the financial income statement by standard accounting procedures and is equal
to the gross cash flow (operating profit before interest and taxes plus allowances for
depreciation) minus capital investments.

2.1.2 Obtaining the Net Benefit of the Project Measured in Terms of Economic Prices

Stage two of the UNIDO approach is concerned with the determination of the net benefit of
the project in terms of economic prices, also referred to as shadow prices.
Market prices represent shadow prices only under conditions of perfect markets which are
almost invariably not fulfilled in developing countries. Hence, there is a need for developing
shadow prices and measuring net economic benefit in terms of these prices.

2.1.3 Adjustment for the Impact of the Project on Savings and Investment

Most of the developing countries face scarcity of capital. Hence, the governments of these
countries are concerned about the impact of a project on savings and its value thereof. Stage
three of the UNIDO method, concerned with this, seeks to answer the following question:
• Given the income distribution impact of the project what would be its effects on
savings?
• What is the value of such savings to the society?

Impact on Savings

The saving impact of a project is equal to

∑ Δ Yi MPSi

Where Δ Yi is the change in income of group i as a result of the project, and MPSi is
the marginal propensity to save of group i.

2.1.4 Adjustment for the Impact of the Project on Income Distribution

Many governments regard redistribution in favour of economically weaker sections or

economically backward regions as a socially desirable objective. Due to practical difficulties
in pursuing the objective of redistribution entirely through the tax, subsidy, and transfer
measures of the government, investment projects are also considered as investments for
income redistribution and their contribution toward this goal is considered in their evaluation
this calls for suitably weighing the net gain or loss by each group, measured earlier, to reflect
the relative value of income for different groups and summing them.

Determination of Weights:

If there are only two groups in a society, poor and rich, the determination of weight is
just an iterative process between the analysts (at the bottom) and the planners (at the
top). This is called “bottom-up” approach. When more than two groups are involved,
weights are calculated by the elasticity of marginal utility of income. The marginal
utility of income is the weight attached to an income is

Wi = (b/ci)n

Where, wi = weight of income at ci level

c i = level of income of group i
b = base level of income that has a weight of 1.00
n = elasticity of the marginal utility of income

2.1.5 Adjustment for the Impact of the Project on Merit Goods and Demerit Goods

The steps of adjustment procedure are:

• Estimating the present economic value
• Calculating the adjustment factor
• Multiplying the economic value by the adjustment factor to obtain the adjusted value
• Adding or subtracting the adjusted value to or from the net present value of the
project as calculated in stage four.

3. Application

The UNIDO Approach was applied to a thermal coal based power plant and a hydro plant.

3.1 Application of UNIDO Approach on Coal Plant

3.1.1 Calculation of Financial Profitability Measured at Market Prices

Table 3.1.1 presents the estimates of revenue collected by the project during its lifetime.

Table 3.1.1: Estimates of Financial Flows of Revenue Earned by the project

During its Lifetime

Year Cost Year Cost Year Cost (Rs. Crores)

2017 1093.95 2026 1768.96 2035 2186.75

2018 1649.93 2027 1796.22 2036 2278.55
2019 1656.66 2028 1827.90 2037 2376.25
2020 1665.44 2029 1870.50 2038 2482.33
2021 1676.39 2030 1803.04 2039 2593.00
2022 1689.65 2031 1870.30 2040 2710.77
2023 1705.37 2032 1941.87 2041 2836.12
2024 1723.72 2033 2019.43 2042 989.84
2025 1744.85 2034 2100.49
The calculation of NPV at market prices for the Thermal based Coal Power Plant turned out
to be Rs. -309.10 crores, therefore as per financial evaluation of the project since NPV is
negative, project should not be undertaken.

3.1.2 Obtaining the Net Benefit of the Project Measured in Terms of Economic Prices

3.1.2.1 Identification of Economic (Social) Benefits and Costs

 Social Benefits:

 The major benefit of setting up this Thermal Power Plant would be the
establishment of fly ash bricks manufacturing that will lead to creation of
employment opportunities for unskilled and skilled workers. Also, after the ban on
manufacturing of Red Bricks as per the mandate of Hon’ble Supreme Court, fly
ash bricks will be used for construction purpose going forward.

 The use of fly ash in manufacturing of fly ash bricks would lead to reduction in
waste disposal costs and environmental costs as plant residue can be reused.

 The total project workforce is estimated to peak at 1,700 during the 5-year
construction period and additional employment of about 100 workers per fly ash
manufacturing plant will be generated. This labor will be otherwise unemployed
or under employed in the Indian economy.

 The project provides employment benefits to the skilled labor during its
operational period.

 Revenue earned by the government in the form of taxes.

 By indulging in coal washing process, the ash content in Indian coal can be
reduced significantly, which will lead to reduction in residue/ash produced in a
plant. Thus, the cost of electricity would increase marginally but there will be
huge environmental benefits. Also, currently only 4% of coal in India is washed
by Coal India.

 Social Costs:

 Health costs incurred to workers of about Rs. 10 crores annually.

 Increase in air pollution by increased emissions of carbon dioxide, sulfur dioxide,

nitrogen oxides, particulate matter (PM), and heavy metals leading to smog, acid
rain, toxins in the environment, and numerous respiratory, cardiovascular and
cerebrovascular effects.

 Coal sludge, also known as slurry, is the liquid coal waste generated by washing
coal. It is typically disposed of at impoundments located near coal mines, but in
some cases it is directly injected into abandoned underground mines. Since coal
 sludge contains toxins, leaks or spills can endanger underground and surface
waters.

 Loss or degradation of groundwater - Since coal seams are often serve as

underground aquifers, removal of coal beds may result in drastic changes in
hydrology after mining has been completed.

 Increased costs of power to end consumers due to rising fuel and coal costs.

Table 3.1.2 shows the Operation and Maintenance (O&M) cost of the project in terms of
shadow (economic) prices.

Table 3.1.2: Estimates of Financial Flows of Operation and Maintenance (O&M)

Expenditures in terms of Shadow Prices (During its Life Time)

Year Cost Year Cost Year Cost (Rs. Crores)

2017 76.34 2026 188.91 2035 313.85

2018 121.06 2027 199.72 2036 331.67
2019 127.98 2028 212.08 2037 350.52
2020 135.31 2029 224.16 2038 372.33
2021 143.04 2030 236.93 2039 393.39
2022 151.23 2031 250.43 2040 415.66
2023 159.88 2032 264.70 2041 439.20
2024 169.02 2033 281.04 2042 154.70
2025 178.69 2034 296.99

Table 3.1.3 presents the estimates of revenue collected by the project during its lifetime after
taking into account net social benefits and costs.

Table 3.1.3: Estimates of Financial Flows of Revenue Earned by the project

During its Lifetime after taking into account Net Social Benefits and Costs

Year Cost Year Cost Year Cost (Rs. Crores)

2017 1065.32 2026 1724.47 2035 2082.97

2018 1635.98 2027 1746.71 2036 2165.81
2019 1639.65 2028 1773.02 2037 2253.96
2020 1645.21 2029 1809.91 2038 2349.86
2021 1652.74 2030 1736.35 2039 2449.67
2022 1662.35 2031 1797.11 2040 2555.87
2023 1674.18 2032 1861.75 2041 2668.88
2024 1688.38 2033 1931.93 2042 950.59
2025 1705.09 2034 2005.10

The NPV calculation was done after doing below mentioned adjustments for social costs and
social benefits:

 The health costs of workers amounting to Rs. 8 crores will be incurred during the
construction phase of the project.
  The O&M cost components i.e. spares, salaries and other expenses were multiplied by
factor of 1.1, 0.8 and 1 to convert into corresponding components in shadow prices.
The water availability costs were also taken into account.

 Coal Washing is a upcoming phenomenon in Indian Coal industry as currently, only

4% of domestic coal is washed by Coal India. Thus, considering that coal washing
will be strictly mandated, the cost of domestic coal would increase by Rs. 300 per
tonne and since the ash content will reduce from 40% to 10%, the gross calorific
value of the coal will also increase by about 25%. Thus, there will be reduction in ash
generated and consequently, less amount of land will be required by disposing of
bottom ash by means of slurry. Also, due to reduced ash content, the coal
consumption will reduce by 20%.

 The Carbon, SO2, NO2 emissions of the plant are well below the global baseline
emission standards for a thermal plant, thus, the emission reduction savings have been
added as revenues.

 Another important new revenue source for NTPC will be the revenue from selling fly
ash to brick manufacturers as after the ban on red bricks for construction purposes, fly
ash bricks will be used for construction and NTPC will earn revenue of about Rs. 500
per tonne of fly ash.

NPV of the project after Stage 2 turns out to be Rs. 120.51 crores. This shows that after taking
into account the net social benefits and costs, it is worthwhile to take up the project as NPV is
positive.

3.1.3 Adjustment for the Impact of the Project on Savings and Investment

Following are the groups which will be benefited by the project:

 Government
 NTPC
 Labor

Table 3.1.4 gives the calculation of saving impact on the above mentioned stake holders

Table 3.1.4: Calculation of Saving Impact on Stakeholders

(Rs Crores)
Stake holders Net Benefit MPS Savings
Impact

Government 767.82 0.6 460.69

NTPC 1370.95 0.55 754.02

Workers 90.80 0.29 26.33

The Net Savings Impact turns out to be Rs. 1241.05 crores.

Calculation of Social Value of Savings

Social value or shadow price of savings is calculated as follows:

I = r(1-a)/(k-ar)
Where,

I is the social value of Rs of savings (investment),

r is the marginal productivity of capital,
a is the reinvestment rate on additional income arising from investment,
k is the social discount rate.

The value of I used in this study is 1.55, which is taken from the study done by Murty (1980)
in which he has explored the problems related to the evaluation of income distributional
effects of public investment projects.

Therefore,
Net saving impact in terms of shadow prices is:

= Total savings × I
= 1241.05 × 1.55
= Rs. 1923.62 crores

Table 3.1.5 gives the calculation of NPV at Stage 3

Table 3.1.5: Calculation of NPV at Stage 3

(Rs Crores)
NPV From stage two 120.52

Net saving Impact 1923.62

NPV at Stage 3 2044.14

Thus, the NPV after taking into account the savings impact turns out to be Rs. 2044.14
crores.

3.1.4 Adjustment for the Impact of the Project on Income Distribution

Table 3.1.6 gives the Calculation of Income Distribution Impact at Stage 4

Table 3.1.6: Calculation of Income Distribution Impact at Stage 4

Ne t
Impact
Stake holde r Income (Rs . cr) We ight (Rs . cr)
Workers (Unskilled) 6.93 1.00 6.93
Government 767.82 0.001373321 1.05
Project 1370.95 0.000609965 0.84
Total Net Income Impact Rs . cr 8.82
The average annual income turns out to be Rs. 50.27 crores from the cash flows obtained in
Stage 2. The total net income impact is Rs. 8.82 crores. So, the difference in income turns out
to be Rs. 41.45 crores.

Now, distributing the difference in income over the life of the plant i.e. 25 years, we get
present value of income to be adjusted which turns out to be Rs. 259.33 crores.

Adjustment of Income Distribution Impact:

The total net income impact turns out to be Rs 8.82 crores while average annual income of Rs
50.27 crores was estimated while calculating NPV at stage 2. Thus, a negative adjustment of
Rs 259.33 crores has to be done to the NPV obtained at Stage 3.

Table 3.1.7 gives the Calculation of NPV after Income Distribution Impact

Table 3.1.7: Calculation of NPV after Income Distribution Impact

Adjusted NPV
NPV from Stage 3 Rs. cr 2044.14
Income distribution Impact Rs. cr -259.33
New NPV of the project Rs. cr 1784.81

Thus, the NPV after Income Distribution Impact turns out to be Rs 1784.81 crores.

3.1.5 Adjustment for the Impact of the Project on Merit Goods and Demerit Goods

The adjustment factor turns out to be 0.39. This shows that social value of the project exceeds
its economic value by 39%.

Calculation of Adjustment Factor and Adjusted NPV:

Table 3.1.8 gives the Calculation of NPV at Stage 5.

Table 3.1.8: Calculation of NPV at Stage 5

Adjustment Factor 0.39

NPV at Stage 4 Rs. cr 1784.81
New NPV after Stage 5 Rs. cr 2480.68

Thus, the final NPV of the project after application of Social Cost Benefit Analysis turns out
to be Rs. 2480.68 crores. Hence, the project should be undertaken as it has multiple social
benefits which are reflected in the final positive NPV of the project.
3.2 Application of UNIDO Approach on Hydro Plant

3.2.1 Calculation of Financial Profitability Measured at Market Prices

Table 3.2.1 presents the estimates of revenue collected by the project during its lifetime.

Table 3.2.1: Estimates of Financial Flows of Revenue Earned by the project

During its Lifetime

Year Revenue Year Revenue Year Revenue Year Revenue (Rs. Cr)

2014 144.78 2023 654.55 2032 931.62 2041 1325.99

2015 460.56 2024 680.73 2033 968.89 2042 1379.03
2016 497.40 2025 707.96 2034 1007.65 2043 1434.19
2017 517.30 2026 736.28 2035 1047.95 2044 1491.56
2018 537.99 2027 765.73 2036 1089.87 2045 1551.22
2019 559.51 2028 796.36 2037 1133.46 2046 1613.27
2020 581.89 2029 828.21 2038 1178.80 2047 1677.80
2021 605.17 2030 861.34 2039 1225.95 2048 1744.92
2022 629.37 2031 895.79 2040 1274.99 2049 1209.81

The calculation of NPV at market prices for the Thermal based Coal Power Plant turned out
to be Rs. -594.23 crores, therefore as per financial evaluation of the project since NPV is
negative, project should not be undertaken.

3.2.2 Obtaining the Net Benefit of the Project Measured in Terms of Economic Prices

3.2.2.1 Identification of Economic (Social) Benefits and Costs

 Social Benefits:

 The major benefit of setting up this Hydro Power Plant would be the creation of
employment opportunities for unskilled and skilled workers.

 The total project workforce is estimated to peak at 2,600 during the 7-year
construction period and about 8,200 additional people (project workforce, service
people, and families) will be residing in the valley during construction. This labor
will be otherwise unemployed or under employed in the Indian economy.

 The project provides employment benefits to the skilled labor during its
operational period.

 Revenue earned by the government in the form of taxes.

 The 2,353 GWh of electricity to be generated each year by the Project will offset
the electricity now generated from other sources.

 According to the CERC’s database on CO2 emissions in the Indian power sector,
the combined margin for the Northern grid is 0.75 ton of CO2 emissions per MWh
(based on a 75:25 mix of thermal power to hydropower generation). The CO2
 emission reduction from the above Project is estimated to be 1.756 million MT per
year. In addition, the Project is expected to offset the emission of 73.87 MT/day of
SO2 and 37.47 MT/day of NOx, given the emissions from an equivalent amount
of electricity generated from the NTPC Sipat Thermal Power Plant, a modern
coal-fired plant.

 Social Costs:

 Rehabilitation costs.

 Loss of agricultural and forest land.

 Rehabilitation costs comprising of resettlement of households.

Table 3.2.2 shows the Operation and Maintenance (O&M) cost of the project in terms of
shadow (economic) prices.

Table 3.2.2: Estimates of Financial Flows of Operation and Maintenance (O&M)

Expenditures in terms of Shadow Prices (During its Life Time)

Year Cost Year Cost Year Cost Year Cost (Rs. Cr)

2014 16.76 2023 71.58 2032 101.89 2041 145.02

2015 52.31 2024 74.45 2033 105.96 2042 150.82
2016 54.40 2025 77.43 2034 110.20 2043 156.85
2017 56.57 2026 80.52 2035 114.61 2044 163.12
2018 58.84 2027 83.74 2036 119.19 2045 169.65
2019 61.19 2028 87.09 2037 123.96 2046 176.44
2020 63.64 2029 90.58 2038 128.92 2047 183.49
2021 66.18 2030 94.20 2039 134.08 2048 190.83
2022 68.83 2031 97.97 2040 139.44 2049 132.31

Table 3.2.3 presents the estimates of revenue collected by the project during its lifetime after
taking into account net social benefits and costs.

Table 3.2.3: Estimates of Financial Flows of Revenue Earned by the project

During its Lifetime after taking into account Net Social Benefits and Costs

Year Revenue Year Revenue Year Revenue Year Revenue (Rs. Cr)

2014 144.78 2023 746.30 2032 1023.37 2041 1417.74

2015 552.31 2024 772.48 2033 1060.64 2042 1470.78
2016 589.15 2025 799.71 2034 1099.39 2043 1525.94
2017 609.05 2026 828.03 2035 1139.70 2044 1583.31
2018 629.74 2027 857.48 2036 1181.62 2045 1642.97
2019 651.26 2028 888.11 2037 1225.21 2046 1705.02
2020 673.64 2029 919.96 2038 1270.55 2047 1769.55
2021 696.91 2030 953.09 2039 1317.70 2048 1836.66
2022 721.12 2031 987.54 2040 1366.74 2049 1301.56
NPV of the project after Stage 2 turns out to be Rs. 381.01 crores. This shows that after taking
into account the net social benefits and costs, it is worthwhile to take up the project as NPV is
positive.

3.2.3 Adjustment for the Impact of the Project on Savings and Investment

Following are the groups which will be benefited by the project:

 Government
 NTPC
 Labor

Table 3.2.4 gives the calculation of saving impact on the above mentioned stake holders

Table 3.2.4: Calculation of Saving Impact on Stakeholders

(Rs Crores)
Stake holders Net Benefit MPS Savings
Impact
Government 4469.39 0.6 2681.64

NTPC 1033.27 0.55 568.30

Workers 32.14 0.29 9.32

The Net Savings Impact turns out to be Rs. 3259.26 crores.

Calculation of Social Value of Savings

Social value or shadow price of savings is calculated as follows:

I = r(1-a)/(k-ar)
Where,

I is the social value of Rs of savings (investment),

r is the marginal productivity of capital,
a is the reinvestment rate on additional income arising from investment,
k is the social discount rate.

The value of I used in this study is 1.55, which is taken from the study done by Murty (1980)
in which he has explored the problems related to the evaluation of income distributional
effects of public investment projects.

Therefore,
Net saving impact in terms of shadow prices is:
= Total savings × I
= 1241.05 × 1.55
= Rs. 1923.62 crores
Table 3.2.5 gives the calculation of NPV at Stage 3

Table 3.2.5: Calculation of NPV at Stage 3

(Rs Crores)
NPV From stage two 381.01

Net saving Impact 5051.85

NPV at Stage 3 5432.86

Thus, the NPV after taking into account the savings impact turns out to be Rs. 5432.86
crores.

2.1.4 Adjustment for the Impact of the Project on Income Distribution

Table 3.2.6 gives the Calculation of Income Distribution Impact at Stage 4

Table 3.2.6: Calculation of Income Distribution Impact at Stage 4

Net Impact
Stakeholder Income (Rs. cr) Weight (Rs. cr)
Workers (Unskilled) 10.33 1.00 10.33
Government 4469.39 0.000203755 0.91
Project 1033.27 0.001583264 1.64
Total Net Income Impact Rs. cr 12.87

The average annual income turns out to be Rs. 35.07 crores from the cash flows obtained in
Stage 2. The total net income impact is Rs. 12.87 crores. So, the difference in income turns
out to be Rs. 22.20 crores.

Now, distributing the difference in income over the life of the plant i.e. 35 years, we get
present value of income to be adjusted which turns out to be Rs. 147.93 crores.

Adjustment of Income Distribution Impact:

The total net income impact turns out to be Rs 8.82 crores while average annual income of Rs
50.27 crores was estimated while calculating NPV at stage 2. Thus, a negative adjustment of
Rs 259.33 crores has to be done to the NPV obtained at Stage 3.

Table 3.2.7 gives the Calculation of NPV after Income Distribution Impact

Table 3.2.7: Calculation of NPV after Income Distribution Impact

Adjusted NPV
NPV from Stage 3 Rs. cr 5432.86
Income distribution Impact Rs. cr -147.93
New NPV of the project Rs. cr 5284.93
Thus, the NPV after Income Distribution Impact turns out to be Rs 5284.93 crores.

3.2.5 Adjustment for the Impact of the Project on Merit Goods and Demerit Goods

The adjustment factor turns out to be 0.41. This shows that social value of the project exceeds
its economic value by 41%.

Calculation of Adjustment Factor and Adjusted NPV:

Table 3.2.8 gives the Calculation of NPV at Stage 5.

Table 3.2.8: Calculation of NPV at Stage 5

Adjustment Factor 0.41

NPV at Stage 4 Rs. cr 5284.93

New NPV after Stage 5 Rs. cr 7457.95

Thus, the final NPV of the project after application of Social Cost Benefit Analysis turns out
to be Rs. 7457.95 crores. Hence, the project should be undertaken as it has multiple social
benefits which are reflected in the final positive NPV of the project.

4 Comparative Analysis

 Government Savings of Unemployment Allowances:

Govt. Savings of Unemployment Allowances

16
14
12
Rs. Crores

10 Govt. Savings of
8 Unemployment
6 allowances
4
2
0
Coal Plant Hydro Plant

Fig. 6.1 Government Savings of Unemployment Allowances

It can be seen from the above graph that the government savings of unemployment
allowances are more for the hydro plant as compared to the coal plant. This can be attributed
to the fact that more workers are engaged during the construction of hydro plant. But, the coal
based plant generates employment for workers not only during the construction period but
also after the commissioning of plant, so the government savings of unemployment
allowances have a long term effect in case of coal plant as compared to hydro plant in which
the savings are only during the construction period. Also, the wage rates are assumed to be
same for arriving at above results.

 Present Value of Emission Reductions:

Present Value of Emission Reductions

400

300
Coal Plant
Rs. Crores

200
Hydro
100 Plant

0
Carbon Emission SO2 Emission NO2 Emission
Reduction Reduction Reduction

Fig. 6.3 Present Value of Emission Reductions

It is clearly evident from above graph that emission reductions are more in case of hydro
plant as compared to coal based power plant. The above graph supports the obvious fact that
since Carbon, SO2, NO2 emissions are negligible for a hydro plant, thus, the reduction
savings are more pronounced in a hydro plant. It can also be seen that in case of coal plant the
emission reduction savings are positive and quite significant as the coal plant emissions are
well below the specified threshold emission levels given by international standards for a
thermal plant. Also, NTPC can make use of reduced emissions from above plants in the form
of emission reduction certificates that can be tradeoff with plants whose emissions are above
threshold level, thereby adhering to emission norms in totality.

 Employment Generation for Workers:

Employment Generation for Workers

3000
2500
No. of Workers

2000 Hydro Plant

1500
1000 Coal Plant
500
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Year
Fig. 6.9 Trends for Employment Generation for Workers
The above graph shows the trends of employment generation for hydro plant and coal
plant. It can be seen from the above graph that hydro plant generates employment only during
the construction phase of the project while coal plant will be able to generate employment
even after the construction of the plant by means of manufacturing of Fly Ash bricks thereby
reducing the unemployment in the society and the unemployment will further reduce as in our
case the employment generation calculation has been done for a single coal plant.

 Impact on Savings:

Impact on Savings
3000.00
2500.00
Rs. Crores

2000.00 Hydro Plant

1500.00
1000.00 Coal Plant
500.00
0.00
Government NTPC

Fig. 6.10 Impact of Savings on Government and NTPC

The graph shows the impact on savings for Government and NTPC. It can be seen that
construction of Hydro project will lead to more income in the hands of the Govt. and
consequently more savings for Govt. as compared to coal plant which increases the savings
of the Govt. by a marginal amount only. On the other hand, coal plant adds more to the
savings of NTPC, so coal project is more desirable from NTPC’s point of view. Thus, impact
on savings yields net gains for both the stakeholders i.e. Government and NTPC for Hydro as
well as Coal project

 Impact on Savings of Workers (Unskilled):

Impact on Savings of Workers (Unskilled)

30.00 26.33
25.00
Hydro
Rs. Crores

20.00
Plant
15.00
9.32 Coal Plant
10.00
5.00
0.00
Workers

Fig. 6.11 Impact of Savings on Workers (Unskilled)

The graph shows the impact on savings of workers. It can be seen from the graph that there
are net gains to the workers from both the plants, but the net gains in savings are more
pronounced in case of coal plant as coal plant is beneficial for the workers in a way that it
generates more employment opportunities for workers as compared to hydro plant.

 Income Distribution Impact:

Income Distribution Impact

12.00
10.00
8.00
Rs. Crores

Hydro Plant
6.00
4.00 Coal Plant

2.00
0.00
Workers (Unskilled) Government NTPC

Fig. 6.12 Income Distribution Impact

The graph shows the income distribution impact on key stakeholders. It can be seen from the
graph that there are net gains in income to all the stakeholders – Government, NTPC and
Workers from both the plants, but the income re-distribution is more pronounced for workers
in case of hydro project which is more desirable as income re-distribution concept aims at
maximizing the benefits to the weaker income group of the society. So, hydro project is more
desirable as it leads to more income re-distribution to workers.

5 Conclusions and Suggestions

Social Cost Benefit Analysis is an important tool for analyzing a project to reflect its positive
and negative impact on the society. Today, it has expanded to evaluation of private projects
as they are much more responsible for good and bad effects on the society. SCBA differs
from financial analysis in the sense that it avoids market price and adopts shadow price to
value the inputs and outputs of a project.

There are two good approaches, viz., UNIDO approach & L-M approach for Social Cost
Benefit Analysis of a project. Practically, these methods are not widely used by private
sectors. The logic behind the appraisal criterion is to select those projects for which the
country’s resources are more appropriate. Thus, the decisions regarding capital allocation
should be taken with regard to Rule Utilitarian approach i.e. maximizing benefits to people
(various stakeholders) at large as businesses cannot strive on profit motives for long term. It
is high time that businesses should align their strategies in line with the needs of the
community in order to foster long term sustainability of the business.
The stage wise application of UNIDO approach to coal plant and hydro plant showed that net
savings impact, net income re-distribution impact are positive for the key stakeholders i.e.
Government, Workers and Project (NTPC) identified for the project. This shows that both the
projects result in net gains to all the stakeholders. Also, electricity is a merit good, so its
social value exceeds its economic value. During the project study it was found that social
value of coal plant exceeded its economic value by 39% and that in case of hydro plant was
about 40%. Hence, it is evident from these figures that these projects are socially viable and
net social benefits will be accrued to the stakeholders.

The study shows that both the plants are improving the demographic factors namely –
savings, income distribution, employment generation. It can be seen from above SCBA
calculations of the plants that both the plants will lead to significant employment generation
with coal plant leading to sustained employment generation even after the commissioning of
the plant. The study has also thrown light on certain factors that will lead to more efficiency
such as coal washing in case of thermal plants that will reduce the ash content in domestic
coal from 40% to 10%, which will lead to reduced coal consumption in thermal plants and
consequently lower tariffs for the end user.

After applying UNIDO approach on the coal and hydro plants respectively, it can be seen that
rejecting the project on the basis of its financial viability is not justified as it is evident from
above results that incorporation of social cost benefit analysis mechanism yields positive
results (NPV) for both the projects i.e. coal plant and hydro plant. Thus, taking into account
the social costs and social benefits associated with the project plays a key role in project
assessment as needs and wants of community at large can’t be ignored.

Table 7.1 below shows the comparative analysis on key demographic factors for both coal
and hydro plants.

Table 7.1: Comparative Analysis of Key Factors for Coal and Hydro Plant

Factors Coal Plant Hydro Plant

Employment Generation Benefit Rs. 6.93 cr. Benefit Rs. 10.33 cr.

Savings Impact Benefit Rs.1923.6 cr Benefit Rs.5051.8 cr

Income Distribution Impact Benefit Rs. 8.82 cr. Benefit Rs. 12.87 cr.

Water Availability Cost Rs. 2.11 cr. Benefit Naturally

Available
Emission Reductions Benefit Rs. 145.5 cr. Benefit Rs. 512.5 cr.
Hence, it can be seen from the above table that Hydro plant provides more benefits as
compared to Coal based power plant and more focus should be given to development of
hydro projects as our country has huge hydro potential and only 25% of it has been explored
so far.

The Social Cost Benefit Analysis of coal and hydro projects has reveals that these projects
are socially viable and net social benefits will be accrued to the stakeholders.

Suggestions

 Social Cost Benefit Analysis should be a part of project assessment for projects whose
merit needs are more i.e. whose social value exceeds the economic value for instance,
electricity.

 By determining the social costs and benefits of above said socially viable projects,
companies can eventually land up with low interest rate finance for the project.

 Coal Washing should be made mandatory for Coal India as currently only 4% of total
domestic coal is washed by Coal India. This will lead to reduced ash content thereby
leading to reduced coal consumption in thermal plants and reduced tariffs for end
consumers.

 NTPC should go for manufacturing fly ash bricks at their thermal plant sites or could
sell the fly ash produced to the fly ash brick manufacturers thereby leading to efficient
utilization of ash and generation of employment.

 NTPC should look out for efficient methods for reducing water consumption in
thermal plants. For instance, using dry or hybrid cooling technologies in place of
traditional wet cooling towers would reduce the water consumption by about 30% -
40%.

 Wet ash handling through slurry should be shifted to dry ash handling by use of
‘hydro bins’ where water is separated from the ash slurry within the plant and the dry
lumps are conveyed to the ash dykes through conveyer belts. This would significantly
reduce the amount of water consumed in ash handling units.

 Government and power generation companies like NTPC should make some attempts
towards enhancement of the hydro power projects as India has a hydro potential of
about 1,48,701 MW of which only 25% i.e. 36878 MW has been utilized so far.

 Wastewater should be treated and recycled to achieve zero discharge and savings on
freshwater intake.

 Shadow prices of the inputs and the outputs used in the projects should be
benchmarked so as to avoid flaws and biasness in the calculation of the economic
costs and benefits.
 References
1. Chandra, Prasanna, (2006), Project: Planning, Analysis, Financing, Implementation,
and Review, 7/e, Tata McGraw-Hill Publishing Co. Limited, New Delhi, Chapter 14.

2. Tevfik F. Nas, (2001), Cost-Benefit Analysis: Theory and Application, 1/e, Sage
Publications, New Delhi, Chapter 4

3. Murty, M. N. and B. N. Goldar (2006), Economic Evaluation of Investment

Projects,Report of Project Sponsored by Planning Commission, Government of India.

4. Belli Pedro, (2001), Economic Analysis Of Investment Operations: Analytical Tools

And Practical Applications

5. R. B. Khanna, (2011), Project Management, PHI Learning PVT. Ltd., New Delhi

6. Environmental Assessment Report 2007 Prepared by NTPC Limited for the Asian
Development Bank (ADB).

7. Social Cost-Benefit Analysis—The Kansas City Light Rail Project by Sudhakar Raju,
Rockhurst University.

8. Social Cost-Benefit Analysis of Delhi Metro By M N Murty, Kishore Kumar Dhavala,

Meenakshi Ghosh and Rashmi Singh ,Institute of Economic Growth Delhi University
Enclave, October, 2006.

9. Mombasa - Nairobi Transmission Line Project Kenya by AFRICAN DEVELOPMENT

FUND PROJECT APPRAISAL REPORT

10. Social and Environmental Impacts of a Mini-hydro Project on the Ma Oya Basin in
Sri Lanka Bhadranie Thoradeniya, Malik Ranasinghe and N T S Wijesekera,
Department of Civil Engineering, University of Moratuwa, Moratuwa , Sri Lanka.

11. M N Murty , Paper on Environmental Accounting For Sustainable Development.

12. The Energy And Resources Institute (TERI) (2012), Enhancing Water-Use Efficiency
Of Thermal Power Plants In India: Need For Mandatory Water Audits